New York, New York (PRWEB) August 30, 2005
We know that capital markets work. If they didnÂt, the stock market (and capitalism itself) would have gone the way of the dinosaurs long ago. You can see this when you look at the long-term performance of the stock market. Since 1926, the S&P 500 has enjoyed average annual growth of just over 10 percent.
The crunch, of course, is that youÂre not investing for 80 years. You might be investing for your kidÂs college in 10 years, or your own retirement in 20 years. And when you look at the stock marketÂs performance over the last few years (since January 2001, the S&P 500 has dropped a bit), you might wonder whether stocks are really your best choice.
When we asked members of the Armchair Millionaire community about investing in the stock market, we found that people are still believers, though their optimism has been tempered by hard experience. Here are two comments:
"The stock market will continue to be the place to make money in the foreseeable future but the returns seen in the mid- to late 90s are gone. We will not see those again." --Fred W.
"The super high returns of the mid to late 1990s are gone -- or at least for my lifetime. Barring something cataclysmic (always a possibility), I think stocks will probably average 8 percent (maybe less) over the next 10 years." --mysticaltyger
My take is that for the long run, the stock market is still the best place to be. And I believe that the most effective way to invest in the stock market is by buying index funds. Still, there are always people who want to dabble in individual stocks. If you count yourself among them, use my guide to stick to the common sense path.
The Armchair MillionaireÂs Common Sense Guide to Investing in Stocks
Dig in. Be committed to doing the research required to make sound decisions. Read and be sure your understand earnings reports and estimates, annual reports, and analysts' reports, for starters. Never--and I mean never--invest in a stock just because someone gives you a "hot tip." (And that someone can even include your financial advisor.)
DonÂt go hog wild. Keep individual stocks a small part of your overall portfolio. I suggest that they make up no more than one quarter of your total investments. In addition, no single stock should take up more than 5 percent of your entire portfolio. For the bulk of your stock market investments, stick with tried-and-true index funds.
Steer clear of the pennies. Stocks that are priced under a couple of dollars per share are called Âpenny stocks. At first glance, their low prices might suggest great bargains. In fact, these are stocks to shun--more often than not, their companies are on the verge of bankruptcy.
Hang in for the long term. No one likes to see the value of their stocks drop, and many people react by selling to protect themselves from further losses. But doing so will guarantee that you'll miss out on the inevitable market recovery. If you did your homework and bought stocks that remain fundamentally sound, then just hang in there.
THE BOTTOM LINE: We know that over time the stock market does provide a return on capital. By investing for the long term, buying quality stocks and keeping them for as long as they still make sense for your portfolio, you'll capture your share of that return.
THE ARMCHAIR MILLIONAIRE WEEKLY SURVEY: Is it a good idea to close out your old credit card accounts? Log on to http://www.armchairmillionaire.com and let us know.
Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at http://www.armchairmillionaire.com.
CONTACT INFORMATION:
Lewis Schiff
Armchair Millionaire
877-833-2823
http://www.armchairmillionaire.com
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